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SEA CHANGE: THE EBBING OF
QUANTITATIVE EASING POLICY AND ITS
IMPACT ON THE CAPITAL MARKETS
THE GLOBAL FINANCIAL CRISIS –
INITIATED BY A LIQUIDITY CRISIS
Z-Score
Euro Zone
U.S. BFCI
Source: Bloomberg. August 2013
The Bloomberg U.S. Financial Conditions Index combines yield spreads and indices from U.S. money markets, equity markets, and bond markets into a normalized index.
The Bloomberg Euro-area Financial Conditions Index combines yield spreads and indices from euro-area money markets, equity markets, and bond markets into a
normalized index.
FINANCIAL CRISIS – THE KEY ROLE
OF FINANCIAL SECTOR LEVERAGE
U.S. financial sector debt as a percent of GDP
Source: Federal Reserve, Epoch Investment Partners, Inc. 2013
THE SET-UP
The liquidity pyramid:
Global liquidity by source of claim
976% of
world GDP
Derivatives
145% of
world GDP
Securitized Debt
80% of
world GDP
7% of
world GDP
Source: Independent Strategy, CLSA; 2009
Bank Loans
Power
Money
81% liquidity
12% of liquidity
6% of liquidity
1% of liquidity
POLICY RESPONSE TO THE GFC ENDED
THE LIQUIDITY CRISIS
Z-Score
U.S. BFCI
Euro Zone
Source: Bloomberg. August 2013
The Bloomberg U.S. Financial Conditions Index combines yield spreads and indices from U.S. money markets, equity markets, and bond markets into a normalized index.
The Bloomberg Euro-area Financial Conditions Index combines yield spreads and indices from euro-area money markets, equity markets, and bond markets into a
normalized index.
DEBT REMAINS A GLOBAL PROBLEM –
POLICY CHOICES
Advanced economies’ gross general government debt to GDP
Debt to GDP (%)
Potential solutions to the overriding debt problem
1. Growth
4. Financial Repression (QE)
2. Austerity
5. Devaluation
3. Default
6. Hyperinflation
Source: International Monetary Fund, World Economic Outlook Database, Epoch Investment Partners 2013
QUANTITATIVE EASING BECAME
A GLOBAL PHENOMENON
Index
Central bank balance sheet expansion
Source: Pavilion Global Markets; 2013
Sea Change – June 19, 2013
THE END OF EASY MONEY
“We also see inflation moving back toward our two percent objective
over time. If the incoming data are broadly consistent with this forecast,
the Committee currently anticipates that it would be appropriate to
moderate the monthly pace of purchases later this year.”
– Federal Reserve Chairman Ben Bernanke, June 19, 2013
BERNANKE’S TAPERING COMMENTS
DRIVE YIELDS HIGHER
U.S. Treasury yield curve: May 1, 2013 vs. September 6, 2013
(%)
September 6, 2013
128 bps
June 18, 2013
September 6, 2013
10-Year Treasury yield
2.20
2.94
Source: US Department of the Treasury, Epoch Investment Partners; September 6, 2013
May 1, 2013
30-Year Treasury yield
3.34
3.87
APPLE’S BOND OFFERING
• On April 30, 2013, Apple issued a total of US$17.05 billion worth of
bonds in six tranches with a weighted coupon of approximately
1.8% and a weighted duration of approximately 10 years.
Coupon
Current Price1
10 Year
2.40%
88.84
30 Year
3.85%
82.05
Issue
1As
of September 11, 2013
THE “MOVIE RUN BACKWARDS”
10-year Treasury constant maturity rate
(%)
Source: Federal Reserve, Epoch Investment Partners; September 6, 2013
MATURITY AND CREDIT QUALITY
SPREADS WIDENING
Yield spreads
US 10Y - US 3M Yield
BAA - AAA Yield
Source: Federal Reserve, Epoch Investment Partners. September 6, 2013.
RECENT GLOBAL RETURNS DRIVEN
BY MULTIPLE EXPANSION
Breakdown of MSCI World Index performance
Annualized Total Return:
19%
Expected Earning Growth
Source: Bloomberg, MSCI, Bernstein Analysis; May 2013
Fwd P/E Expansion
Annualized Total Return:
33%
Dividend (Inc. Reinvestment)
CHINA’S SHADOW BANK LIQUIDITY SQUEEZE
China interbank 7-Day repo
(%)
Source: Bloomberg, Epoch Investment Partners; August 2013
CHINESE MANUFACTURING ACTIVITY
CONTINUES TO SLOW . . .
Index
China Manufacturing PMI
Source: Bloomberg, Epoch Investment Partners; September 1, 2013
FLOWING THROUGH TO
COMMODITY-BASED ECONOMIES
Index
Emerging Market Economic Surprise Index1
1.
Aggregates economic data from multiple EM countries; positive numbers indicate that the data is beating expectations; negative numbers show data missing expectations
Source: Citigroup Global Markets. August 15, 2013.
EMERGING AND COMMODITY-BASED
MARKETS HIT HARD IN 2Q
World equity market returns 2Q 2013
(%)
Source: MSCI, S&P, Russell; June 2013
QE – BANK OF JAPAN ACCELERATING
ASSET PURCHASES . . .
100 Million Yen
Bank of Japan: Total assets
Source: Bank of Japan; July 2013
. . . DRIVING YEN LOWER
AND SPURRING GROWTH
Japanese Manufacturing PMI
Yen/dollar exchange rate
¥/$
Source: Federal Reserve; Bloomberg; Epoch Investment Partners; September 2013
Index
STRUCTURAL REFORMS REQUIRED
FOR ABE-NOMICS TO WORK
• Labour market reforms
• Introduction of favourable corporate tax structure
• Reduce trade barriers and encourage foreign direct investment
• Reform agricultural policy, in particular the supply
management policy
U.S. EMPLOYMENT: A SLOW BUT
STEADY RECOVERY
Change in total U.S. non-farm employment
Thousands of Persons
3/2010 through 7/2013:
6.7 million jobs gained
2/2008 through 2/2010
8.8 million jobs lost
Source: Federal Reserve Economic Data; July 2013
INFLATION IS STILL NOT A FACTOR
Year-Over-Year % Change
Personal Consumption Expenditures Price Index
Source: Federal Reserve Economic Data; June 2013
U.S. RETURNS ALSO DRIVEN BY MULTIPLE
EXPANSION
S&P 500 and forward earnings multiples
15x
Index
14x
13x
S&P 500
Source: Standard & Poors, Yardini Research, Epoch Investment Partners; August 16, 2013
LOOKING BEYOND QE IN THE U.S.
• Stocks are attractive in the long term, especially relative to
bonds, providing the world grows.
• Extreme valuation disparities present an investment opportunity.
• As interest rates rise and other macro factors wane, equity
returns will be more dependent on company fundamentals.
• Companies with growing free cash flow and effective capital
allocation policies should outperform.
BEGINNING OF THE “GREAT ROTATION”
$ Billions
Net flows into mutual funds
Source: Strategas; August 2013
A “RISK AVERSION RALLY”
Discount/premium
1-year forward P/E to 15-year avg. P/E
Discount/premium
1-year forward P/E to S&P 500
Telecommunication
Services
Utilities
Telecommunication
Services
Utilities
Materials
Health Care
Industrials
Industrials
S&P 500
Materials
Health Care
-45%
Source: Strategas; June 2013
Information
Technology
Information Technology
DEFENSIVE SECTORS ARE EXPENSIVE
RELATIVE TO CYCLICAL SECTORS
Ratio S&P 500 Defensive Sectors* NTM P/E
to S&P 500 Cyclical Sectors# NTM P/E
Defensive sectors expensive
Parity
Defensive sectors relatively
cheap
* Defensive: Health Care, Staples, Utilities, Telecom;
# Cyclical: Industrials, Discretionary, Energy, Tech, Materials
Source: Strategas; June 2013
INVESTORS BECOMING MORE
DISCRIMINATING ABOUT YIELD
High payout ratio less of a dominant factor
108
106
104
102
100
98
96
94
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Dividend Payout Ratio High to Low Performance
Source: Cornerstone Macro; May 2013
Jun-13
OPPORTUNITIES AFTER THE END OF ZIRP
Most crowded factors
Percentile of crowding vs.
10-Year history*
*U.S. Large Caps, 100% = Most Crowded
**U.S. Large Caps, 0% = Least Crowded
Source: FactSet, Thomson Reuters and Bernstein Analysis; May 2013
Least crowded factors
Percentile of crowding vs.
10-Year history**
SUMMARY
•
•
•
A sea change underway – the end of ZIRP in the U.S.
– Discount rate for financial assets will rise
– Bonds most adversely affected
– Equities to experience P/E headwinds
Global themes
– Best positioned geography: U.S.
– Worst positioned geography: Emerging markets
– Wait and see: Japan
– Valuation beginning to be attractive in Europe
As macro factors wane, equity returns will be more dependent on company
fundamentals
– Slow economic growth will limit revenue and earnings growth
– Shareholder yield will continue to play a dominant role in total return strategies
– Companies with growing free cash flow and effective capital allocation policies
should outperform
– P/E upward move at an end
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